Monday Grok: Groupon is a crock

For the record, and so you can hold him to account in future, long after others have stopped caring, Grok thinks Groupon is a crock. The daily deal leader IPO’d on Friday or at least it released a tiny fraction of its stock to public markets to cynically exploit demand during its rare moment in the sun.

The krill rushed into the jaws of the giant whale, as they always do, sending the price soaring from $20 to over $30. But it will end badly for the krill. It always does. Some 20 of the top 25 tech IPOs this year are already under water, and Groupon, the biggest dotcom stock market blazer since Google, will follow that trend if you follow the smart money.

To justify its valuations, Groupon needs to settle in at annualised growth rates of around 40 per cent a year while getting its costs under control. This is quite a bind. And remember, it’s already huge in revenue terms and no longer has the game to itself. Setting aside the other daily deals, competitors who have rushed into the space it created, Groupon now has Amazon and Google to contend with, and god only knows what Facebook might do.

But here's the real problem from Grok's perspective. Groupon is also a dud for sellers — you remember them, they’re the second half of any transaction. And group buying is especially dangerous if you’re a smaller merchant — the category which provides Groupon its volume. You're betting your tiny business against the power of Groupon’s vast network of rapacious and comically disloyal buyers. And guess what, you're going to get crushed. So in the end, the rational sellers will walk away just like they walked away from corporate procurement portals in dotcom 1.0.

Groupon instead will need lots of irrational sellers to sustain its growth, and that means lots of expensive sales people selling those irrational outcomes. That doesn't strike Grok as an especially sustainable idea.
Then again, Grok is a shocking investor. His biggest single bet ever was $25K on a winery in Western Australia which returned to his family fortune the princely sum of minus $25K. So if you and your money still want to foolishly split paths, at least take the time to read this excellent analysis by celebrity stock watcher Henry Blodget — the editor of Business Insider and former dotcom stock tipper extraordinaire — before that unfortunate business with the SEC.

Blodget says he wouldn't touch Groupon right now with a barge pole, or words to that effect, but in the long term he remains positive. Here's what he wrote on Friday after the Groupon IPO popped, as we say in the trade. "Groupon's near-term upside, meanwhile, appears to be limited, at least based on the company's fundamentals. Groupon is already being valued at a fifth of Amazon's value. It has already picked the low-hanging fruit in its key markets. It is cutting back on marketing costs, which is bringing growth to a screeching halt. Its core business in the US is shrinking. And Groupon is already totally global--there aren't many new markets to roll out in."
So Blodget remains a bull long-term on Groupon, but his concern is more about the bumpy ride in between now and the horizon. Grok's halfway there with Blodget. That is, we buy the negative but we remain very sceptical on the upside. That's because we saw it all before, admittedly in a different flavour, with corporate procurement portals in dotcom 1.0.

Who remembers Cyberlynx? Who remembers CorProcure?

A phalanx of shiny suited, clueless, blue chip MBA newbies blew their shareholders dough backing those hopeless ponies. Then of course there’s the cautionary tale of Ariba, the company whose software underpinned so many corporate group purchasing sites at the turn of the century. For those of you under 30, it's enough to know that Ariba listed at around $2 billion, spiked on day one to almost $6 billion, peaked eventually at close to $40 billion and today is worth only about $3 billion. That’s still 50 per cent above water but a life time shy of its day one close, and it’s hard to imagine it ever getting back there.
The New Yorker's Nicholas Thompson sees no need to hedge his bets, aka Blodget. "With its decreasing profit margins, fishy accounting, massive marketing expenses, floundering innovations, massive insider payouts, and surging competitors, Groupon is surely not worth thirteen billion dollars, or whatever its market cap is at this very moment. If you have stock, sell it immediately."

Madness, but the kind you might like

Finally, from madly overvalued stocks to wildly over compensated executives (and that’s a shamelessly moral judgment, not a commercial one) Mashablereports that Apple will divvy up $400 million in bonuses between seven key executives. They don't get to spend the loot immediately though, with many of the shares not vesting until June 2012 and some not until September 2016. Imagine knowing the pot of Gold was right there, almost within your grasp, but you had a year or maybe five years to ride the value curve roller coaster every minute of every day. And always the ever present risk of the kind of spectacular Hollywood style train wreck that only stock markets can deliver. We’re betting that would drive you mad... and we’re betting that’s the kind of madness you would be willing to risk.

Andrew Birmingham is the CEO of Silicon Gully Investments and the former associate publisher of the Financial Review group. Follow him on Twitter @ag_birmingham

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